High-tech help coming for marginal applicants; Software to identify the left-out deserving


THOUSANDS of homebuyers whose imperfect credit histories disqualify them for a home mortgage -- or force them to pay higher interest rates -- are on the verge of getting some new, high-tech help.

The company that invented the statistical models and software behind the "credit scores" used by mortgage lenders and credit bureaus nationwide plans to introduce a new, more powerful version that "sees through" credit records to spot applicants who appear marginal but deserve a mortgage.

Dubbed the "next generation" credit risk score, it purports to do for mortgage lenders what high-definition technology does for TV: provide a sharper picture of loan applicants' propensity to miss or make late mortgage payments in the future.

In the mortgage market of 1999, virtually anyone who applies for a loan has his or her credit bureau files "pulled" electronically and scored. The score used by most lenders is known as a "FICO," after the San Rafael, Calif., firm that developed it -- Fair, Isaac & Co. Inc.

The FICO scores currently in use assign relative risk rankings to applicants based on intricate statistical analyses of their credit histories. Applicants whose files show they've always paid bills on time and always make moderate, responsible use of their credit cards and other credit lines are assigned the highest scores -- anywhere from 700 to above 800. A high FICO score means the applicant represents a low risk of future nonpayment to the lender.

Consumers who've been late paying bills to creditors tend to present higher risks for the future, and they get low scores -- generally from the 400s to the low 600s.

FICO scores are ubiquitous: Not only do mortgage and credit card lenders use them, but so do employers, insurance companies, landlords and various other people you do business with every day. FICO scores are in such widespread use, lenders say, because they work. People with high scores do in fact tend to default far less frequently than people with low scores.

Predictive scores

But Fair, Isaac believes that, with statistical and behavioral data it has compiled from millions of consumer credit files during the past decade, it can now produce even more powerfully predictive scores -- especially useful for identifying people who appear more risky at application than they really turn out to be.

According to Fair, Isaac credit bureau products director Sally Taylor-Shoff, the "next generation" scores will "allow lenders to approve loans to more borrowers" than they would have using current scoring technology.

The idea is this: Even among borrowers who are scored as relatively high-risk, a portion of them will turn out to pay their loans on time, just like applicants with better scores. Similarly, a percentage of people with high scores go into default or foreclosure. The challenge is how to spot as many of the truly low-risk applicants hidden within the higher-risk score categories as possible.

The "next generation" FICO scores promise to do that, and should be a boon to homebuyers currently treated by lenders as marginal or rejected.

For example, say you apply for a mortgage at the going market interest rate, which happens to be all you can afford. Because of one or more factors -- insufficient credit history, late payments or heavy use of available credit lines -- your FICO score comes in at 600. The lender, however, has set 620 as the absolute minimum score borrowers need to qualify for the going market rate.

Your unhappy choice: Agree to the quarter percentage point higher rate quote and higher fees the lender offers you or put off your plans of buying a home.

Statistical guidance

Using "next generation" FICO scoring software, the scenario might work like this: Based on statistical guidance from Fair, Isaac, the lender revises downward its minimum acceptable score to 600, and OKs your loan at the going market rate. The sharper-definition score recognizes that your combination of credit file imperfections isn't really all that bad. You're not a cream puff 800 FICO applicant, to be sure, but you're not likely to turn out to be a deadbeat, either.

Fair, Isaac is in the early stages of rolling out its "next generation" FICO scores, and the first uses for mortgage applicants may not be until next year. Even after they're out in the marketplace, according to Taylor-Shoff, lenders will have the choice of using the current scores or the new.

In the meantime, keep these rules in mind: Don't "max out" on credit cards because that can drop your score like a rock. Make active use of credit opportunities, but be a stickler about paying on time. Just a couple of late payments can pull your score down enough to disqualify you for a new home mortgage.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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